Monday, November 02, 2015

Only connect: security company enjoined from false association with ADT

ADT provides electronic security services and equipment to
nearly one quarter of those American homes that are equipped with alarm
systems. It sued Capital Connect, four other alarm-service sale companies, and
five individual alarm-service sales persons, alleging that they sell alarm
systems in unannounced door-to-door sales visits, during which the defendants
“confuse the homeowners into believing that the defendants are somehow
affiliated with ADT.”

Capital Connect claims to use independent contractors to
sell its services in 10 states.It’s a
dealer for one of ADT’s rival security monitoring service companies,
Monitronics International.Its sales
force allegedly misled “ADT’s customers into believing that [Capital Connect]
represent[s] ADT, or that ADT has exited the market, or that ADT’s installed
equipment is outdated and in need of an ‘upgrade.’ ” ADT’s litigation manager
indicated that the number of customer complaints about these practices nearly
tripled in 2015, from 42 complaints during the same period in 2014 to 112
complaints this year. ADT claimed “50 reports of false sales pitches occurring
in May 2015 alone ... plus another 41 for the first three weeks of June 2015.”ADT argued that this rapid escalation, and
the risk that Capital Connect would hire college students for the summer,
evidenced the need for a preliminary injunction. Though summer is over, the
court found that ADT presented enough evidence of continuing use of illegal
sales tactics to warrant a preliminary injunction.

Customer declarations recounted a variety of ADT-related
sales tactics, including claims that ADT has gone out of business; claims that
Capital Connect had acquired ADT; claims that Capital Connect was a contractor
for ADT; claims that Capital Connect was affiliated with ADT in some manner,
such as being the manufacturer that made the equipment that ADT installed;
claims that ADT had left the local market; claims that ADT’s equipment was
susceptible to malfunction, or tampering; claims that the Capital Connect sales
associate was at the home to “upgrade” or “update” its alarm system; claims
that ADT customers would not be able to reach 911 in case of an emergency; and
claims that the sales associates were sent by ADT to check or replace ADT
equipment.[Interesting that the
disparagement is mixed in with the association claims; not something you’d
expect side by side.]

Capital Connect argued that it had adopted several measures
to govern its sales force.Its training
manual warned sales associates of the harm a single damaging story on the local
news covering its sales tactics could do to the company.In fact, there had been several TV stories in
local markets about Capital Connect’s sales tactics.

Capital Connect also required its sales force to agree to
its “Code of Conduct, Sales Rules, and Sales Ethics Agreement,” and dressed its
sales force in Capital Connect labeled polo shirts, with photo identification
cards labeling the sales associate as a representative from Capital Connect. “Sales
Rules” prohibited the sales associates from engaging in inappropriate sales
tactics, including a prohibition against “tell[ing] a potential customer that
has an existing system with monitoring services that their existing alarm
company (1) has been bought out/merged with Capital Connect, (2) is no longer
monitoring their system, (3) has sent you to their home to upgrade their alarm
....” In addition, Capital Connect requires new customers who had a
pre-existing alarm service agreement with a different monitoring service to
sign an “Alarm Upgrade Agreement,” which expressly disclaims any connection
between Capital Connect and the current alarm monitoring company. Finally,
Capital Connect made quality assurance calls, during which a Capital Connect
representative asked the customer if he/she understood that Capital Connect was
not affiliated with ADT and that the customer had the responsibility to cancel
his/her current contract with ADT.

Nonetheless, ADT’s customers continued to report the
prohibited behavior, including 70 complaints to ADT in June and 57 complaints
in July, equaling 269 complaints in 2015.(Although ADT cited studies to support its claim that complaints
represented only a fraction of the time the tactics were used, since under 5%
of consumers take the time to complain, the court didn’t rely on those studies
to support its grant of a preliminary injunction.

The court extensively discussed the sufficiency of declaration
evidence on a motion for preliminary injunction without a hearing; otherwise
inadmissible evidence may be considered for a preliminary injunction.Most of the declarants’ out-of-court
statements weren’t hearsay in that they were offered to show customers’ state
of mind, or to show that Capital Connect sales associates made the statements
claimed: a verbal act.

Capital Connect attacked the credibility of some of ADT’s
declarants through transcripts of recorded quality assurance calls. Ten of them
had recorded quality assurance calls and signed Alarm Upgrade Agreements in
which they denied any confusion about whether Capital Connect is affiliated
with ADT by initialing next to the line in the contract. Two customer
declarants also corrected the typed declaration with hand-written notes.However, Capital Connect didn’t deny that its
sales force (1) claimed to have been affiliated with ADT, (2) misrepresented
the quality of ADT’s equipment to gain favor of the customers, (3) claimed that
Capital Connect has bought out or taken over ADT, (4) stated that Capital
Connect has purchased the customer’s account from ADT, (5) misrepresented that
ADT have either gone out of business or left the local market, or (6) made
other misrepresentations or false statements. Although Capital Connect disputed
certain facts and raised credibility issues regarding roughly thirteen of ADT’s
declarants, it didn’t present evidence contradicting allegations central to the
merits of the motion for preliminary injunction and it failed to attack the
credibility of ADT’s remaining 55 declarants. It could have offered
declarations from its sales associates to dispute the statements reported by
ADT’s declarants, so it failed to present a factual dispute.

The court didn’t extensively analyze all the parts of the
multifactor confusion test because, for purposes of a preliminary injunction,
ADT adequately offered sufficient evidence of actual confusion, which can be
shown by anecdotal instances.Capital
Connect argued that ADT has not reported nearly enough instances of confusion
given the size of the market. But the court was satisfied by the 55
declarations, four local news reports, and an employee affidavit regarding 269
complaints processed in 2015.The news
reports were hearsay, but could be considered on a motion for preliminary
injunction, and the reports were also admissible to “show public perceptions”
of Capital Connect’s conduct.

In any event, very little evidence is required to show
actual confusion. This was more than a fleeting mix-up.The affidavits, even disregarding the ones
for which Capital Connect offered allegedly conflicting transcripts of phone
calls with the same customer, showed “actual confusion about what entity the
sales associate at the door represented, with what entity the sales associate
was affiliated, how the sales associate came to arrive at the door, and the
purpose for which he/she was at the door.”

Capital Connect also argued that the confused customers in
the declarations weren’t reasonably prudent purchasers, given Capital Connect’s
measures to prevent confusion such as requiring its sales force to wear Capital
Connect gear.But where there is an
“explicit representation of a relationship” between the violator and the
claimant, a customer is more likely to be confused, and only a few declarants claimed
that the Capital Connect’s sales associate actually pretended to be an ADT
agent. Thus, different gear wasn’t enough to avoid affiliation confusion.

Capiral Connect argued that it used disclaimers in its
agreement and a follow up telephone call disclosing that it was not affiliated
in any way with ADT. ADT, in response, argued initial interest confusion.Some scholars (hi!) have argued that Lexmark should end IIC as a doctrine
because IIC does not represent proximate cause. “See, e.g., Deborah R.
Gerhardt, Lexmark and the Death of Initial Interest Confusion, 7 Landslide 22,
27 (2014); Jennifer E. Rothman, Initial Interest Confusion: Standing at the
Crossroads of Trademark Law, 27 Cardozo L. Rev. 105, 189–91 (2005).” But despite Professor Gerhardt’s prediction,
no court has applied Lexmark to IIC
or “unfair competition claims generally.”Lexmark’s statement comes

from a section of the opinion in
which the Supreme Court holds that the proximate causation principle from
common law torts applies to a Section 43(a) claim, thus narrowing the class of
third parties who can claim to have been injured by a Lanham Act violation. It
does not directly relate to the issue before the court here.

[Actually, it does: ADT is a “third party” relative to
Capital Connect’s representations to potential customers.That doesn’t mean there’s no proximate
causation!But it does meanthat Lexmark
should be considered (as does the plain language of Lexmark, which interpreted the language of the purpose clause of
the Lanham Act and §43(a), not the language of §43(a)(1)(B)).]

IIC still appears to be a valid theory in the Fifth Circuit
after Lexmark, but the court didn’t
rest its likely success finding on IIC. Instead, ADT presented sufficient
evidence that Capital Connect’s false sales pitches actually confused customers
into thinking there was some affiliation with ADT or that ADT’s equipment was
faulty.

Capital Connect argued that it wasn’t liable for the
unauthorized conduct of its independent contractors. ADT argued that principal-agent liability
applied, and the court agreed, even if the sales force was classifed as
independent contractors.Capital Connect
exerted sufficient control over the sales force to make them agents: it
required its sales force to wear Capital Connect gear; to complete training; to
sign a Code of Conduct; to wear a Capital Connect badge; and to obey its sales
rules, all on pain of punishment.Anything that occured during the sales pitch of the sales associate was
clearly within the scope of the agency, as it was the central purpose of the principal-agency
relationship.

ADT further alleged that Capital Connect misled consumers by
falsely associating itself with ADT through the use of the terms “upgrade” and
“update.” In Stokely–Van Camp, Inc. v. Coca–Cola Company, 646 F.Supp.2d 510 (S.D.N.Y.2009),
a district judge in the Southern District of New York held that Powerade’s use
of the phrase “Upgrade your formula. Upgrade your Game” on its labels was not
“literally false” or “false by necessary implication” because reasonable
consumers could interpret the phrase to compare Powerade to Gatorade, or could
compare this new Powerade drink to older Powerade drinks. But context is key to
misleadingness.Here, the sales
associates referred to the security alarm system already installed, implying a
relationship with ADT. Anyway, the
declarations of dozens of customers saying they were confused by the use of the
terms “upgrade” and “update,” plus four news reports citing the misleading
statements, showed actual deception by these ambiguous terms.

Irreparable harm: Along with eBay and Winter, Lexmark arguably supports the argument
that there should be no presumption of irreparable injury in Lanham Act cases,
as it says that a plaintiff couldn’t obtain relief “without evidence of injury
proximately caused by Lexmark’s alleged misrepresentations.”It’s not clear whether the Fifth Circuit
still recognizes the presumption, and it still won’t be, because the court here
didn’t rely on a presumption.

Instead, the court found irreparable harm because the
evidence showed that the sales reps were continuing to cast aspersions on ADT
and misrepresent Capital Connect’s relationship with ADT.As long as that was true, “ADT has lost
control of its brand.” And “if one trademark user cannot control the quality of
the unauthorized user’s goods and services, he can suffer irreparable harm.”
[Here’s where the magic happens!“Can”
suffer becomes “likely” to suffer—except that it’s not.] ADT’s inability to control its reputation
meant that it was suffering irreparable harm without an injunction, since harm
to brand reputation and goodwill “is impossible to calculate.” Capital Connect “unfairly
exploited” ADT’s “time, effort, and expense exerted to create and define its
brand.”[Again, how Capital Connect’s
benefit is ADT’s loss is not clear.]

Moreover, money damages were inadequate because Capital Connect was disparaging ADT’s brand
and was continuing to use ADT’s reputation and good will to mislead ADT’s
customers into buying Capital Connect’s services; this sort of damage is
difficult to quantify.

Capital Connect argued that harm wasn’t imminent because ADT’s
customer declarations dated from 2013.But Capital Connect continued to use the challenged tactics, and ADT’s
delay wasn’t too great given that it was investigating in good faith before,
and that the number of complaints spiked in 2015.Nor did Capital Connect’s safeguards preclude
a finding of irreparable harm, because of the evidence that its sales reps were
continuing their misrepresentations.

Capital Connect argued that its lawful interests would be
harmed by an injunction, but the injunction would only prevent illegal unfair
competition. “[P]reventing one’s agents from breaking federal law is not
impossible to monitor and accepting that argument would be against public
policy.”Plus, the court narrowed the
scope of the injunction from ADT’s requests.

As for the scope of the injunction, the Fifth Circuit said that
a “competitive business once convicted of unfair competition ... should
thereafter be required to keep a safe distance away from the margin line even
if that requirement involves a handicap as compared with those who have not
disqualified themselves.” Capital
Connect was enjoined from suggesting endorsement by, sponsorship by, or
affiliation with ADT.However, the court
didn’t enjoin the use of the word “outdated,” “because preventing a competitor
from discussing the age of equipment unduly restrains Capital Connect’s speech
in its sales pitches.”

Nor would Capital Connect’s reps be required to use a
script.“Requiring Capital Connect’s
sales force to pursue sales like a robot, regurgitating a court ordered script
imposes too much restraint on Capital Connect. Capital Connect’s sales force
may refer to themselves as representatives of an alarm company or a security
company.”The court also refused to specify
the clothing Capital Connect reps must wear. Instead, it expected Capital
Connect to enforce, and ensure compliance with, its company policies and code
of conduct, “which the record shows it has not sufficiently accomplished thus
far.”

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